SOLUTIONS MANUAL
What,s included ?
Complete end-of-chapters exercises solutions ✅
Complete Appendix Solutions
, Table of contents
Chapter 1: Economics: Foundations and Models
Chapter 2: Trade-offs, Comparative Advantage, and the Market System
Chapter 3: Where Prices Come From: The Interaction of Supply and Demand
Chapter 4: GDP: Measuring Total Production and Income
Chapter 5: Unemployment and Inflation
Chapter 6: Economic Growth, the Financial System, and Business Cycles
Chapter 7: Long-Run Economic Growth: Sources and Policies
Chapter 8: Aggregate Expenditure and Output in the Short Run
Chapter 9: Aggregate Demand and Aggregate Supply Analysis
Chapter 10: Money, Banks, and the Bank of Canada
Chapter 11: Monetary Policy
Chapter 12: Fiscal Policy
Chapter 13: Inflation, Unemployment, and Bank of Canada Policy
Chapter 14: Macroeconomics in an Open Economy
,CHAPTER 1 | Economics: Foundations and Models
SOLUTIONS TO END-OF-CHAPTER EXERCISES
Three Key Economic Ideas
1.1
Learning Objective: Explain these three key economic ideas: People are rational; people
respond to incentives; and optimal decisions are made at the margin.
Review Questions
1.1 “People are rational” is the assumption that decision makers explicitly or implicitly weigh the benefits
and costs of each action and then choose an action only if the benefits are expected to outweigh the
costs. “People respond to incentives” means that consumers and firms consistently respond to
economic incentives. “Optimal decisions are made at the margin” means that most decisions are not
“all or nothing” but involve doing a little more or a little less of an activity. Therefore, the optimal
decision is to continue any activity up to the point where the marginal benefit equals the marginal
cost.
1.2 Scarcity is the situation in which unlimited wants exceed the limited resources available to fulfill those
wants. Economics is the study of the choices consumers, business managers, and government officials
make to attain their goals. Scarcity is central to the study of economics because scarcity requires
people to make choices about how to use their resources to best fulfill their wants.
Problems and Applications
1.3 Institutions will need to alter the incentives faced by students with respect to cheating. If students are
rational to some degree, the decision to cheat will be based on the costs and benefits of doing so. Any
action to either increase the cost of cheating or reduce its benefit is likely to lead to fewer academic
offenses. For example, institutions could increase the penalties or the likelihood of getting caught to
increase the cost of cheating. They could also increase the frequency (and reduce the weight) of
assessments to reduce the benefit of cheating on any one assessment.
1.4 a. Students face scarcity of time, like everyone else, and respond to the incentives of the teacher’s
grading system. Students have more incentive to direct their efforts into the parts of the course
that have the most weight in the grading system.
b. Too little weight on outside readings or the like gives students little incentive to read and master
the material. Students will put less effort into the parts of the course that have little effect on their
grades.
c. Quizzes over assigned readings would give students an incentive to come to class having read the
upcoming material. Some teachers give preparation assignments where students have to read and
answer questions about the upcoming material, and over the course of the semester students have
to successfully complete a certain percentage of the preparation assignments to qualify for an A,
or B, or other grade in the course.
Copyright © 2027
, 2 CHAPTER 1 | Economics: Foundations and Models
1.5 The carbon price and the subsequent increase in the price of gasoline (and other carbon-intensive
products) will encourage people to use less gasoline. If people respond to the negative incentive of
higher gas prices by using less gas, maybe by taking the bus or buying a more fuel-efficient car, we
will emit fewer greenhouse gases and do less damage to the environment.
1.6 a. In deciding whether or not to go to the gym on a specific day, most people aren’t comparing the
benefits of an active lifestyle and the cost of the gym membership. They’re comparing what they
stand to miss out on and the relatively small benefit any single workout will have on their overall
health. By implementing a simple payment system, the researchers increase the benefit of a small
number of trips to the gym. Further thought: The benefits of going to the gym tend to materialize
over a long time after the decision to go to the gym is made. Some of those benefits will be
received years into the future. By offering cash payments in the relatively near term, the
researchers offer a benefit that can be received in the same time frame as the costs of going to
the gym are paid.
b. Those who do not respond to the monetary incentive to go to the gym clearly value their other
options more than the health benefits and monetary reward received by going to the gym. Consider
a student who is working to pay for their education. The payment received by going to the gym is
likely less than the payment received by going to work. In short, the incentive isn’t big enough.
1.7 Akhila is correct. The difference between the grade before and after watching an extra episode is
exactly the same as knowing the change in the grade.
1.8 Your friend is failing to think at the margin. It doesn’t matter how much time your friend has already
spent studying psychology. What matters is the marginal benefit to be received from studying
psychology relative to the marginal cost, where cost is measured as the opportunity cost of lower
grades in other subjects. If the course is required to graduate, that may raise the marginal benefit
associated with completing the course.
The Economic Problems All Societies Must Solve
1.2 Learning Objective: Discuss how a society answers these three key economic questions:
What goods and services will be produced? How will the goods and services be
produced? Who will receive the goods and services produced?
Review Questions
2.1 Scarcity implies that every society and every individual face trade-offs because wants are unlimited,
but the ability to satisfy those wants is limited. Societies and individuals cannot have everything they
want, so they have to make choices about what to have and what not to have.
2.2 The three economic questions that every society must answer are: (1) What goods and services will
be produced? (2) How will the goods and services be produced? (3) Who will receive the goods and
services produced? In a centrally planned economy, the government makes most of these decisions.
In a pure market economy, almost all these decisions are made by the decentralized interaction of
households and firms in markets. In a mixed economy, most economic decisions result from the
interaction of buyers and sellers in markets, but the government plays a significant role in the
allocation of resources.
Copyright © 2027
What,s included ?
Complete end-of-chapters exercises solutions ✅
Complete Appendix Solutions
, Table of contents
Chapter 1: Economics: Foundations and Models
Chapter 2: Trade-offs, Comparative Advantage, and the Market System
Chapter 3: Where Prices Come From: The Interaction of Supply and Demand
Chapter 4: GDP: Measuring Total Production and Income
Chapter 5: Unemployment and Inflation
Chapter 6: Economic Growth, the Financial System, and Business Cycles
Chapter 7: Long-Run Economic Growth: Sources and Policies
Chapter 8: Aggregate Expenditure and Output in the Short Run
Chapter 9: Aggregate Demand and Aggregate Supply Analysis
Chapter 10: Money, Banks, and the Bank of Canada
Chapter 11: Monetary Policy
Chapter 12: Fiscal Policy
Chapter 13: Inflation, Unemployment, and Bank of Canada Policy
Chapter 14: Macroeconomics in an Open Economy
,CHAPTER 1 | Economics: Foundations and Models
SOLUTIONS TO END-OF-CHAPTER EXERCISES
Three Key Economic Ideas
1.1
Learning Objective: Explain these three key economic ideas: People are rational; people
respond to incentives; and optimal decisions are made at the margin.
Review Questions
1.1 “People are rational” is the assumption that decision makers explicitly or implicitly weigh the benefits
and costs of each action and then choose an action only if the benefits are expected to outweigh the
costs. “People respond to incentives” means that consumers and firms consistently respond to
economic incentives. “Optimal decisions are made at the margin” means that most decisions are not
“all or nothing” but involve doing a little more or a little less of an activity. Therefore, the optimal
decision is to continue any activity up to the point where the marginal benefit equals the marginal
cost.
1.2 Scarcity is the situation in which unlimited wants exceed the limited resources available to fulfill those
wants. Economics is the study of the choices consumers, business managers, and government officials
make to attain their goals. Scarcity is central to the study of economics because scarcity requires
people to make choices about how to use their resources to best fulfill their wants.
Problems and Applications
1.3 Institutions will need to alter the incentives faced by students with respect to cheating. If students are
rational to some degree, the decision to cheat will be based on the costs and benefits of doing so. Any
action to either increase the cost of cheating or reduce its benefit is likely to lead to fewer academic
offenses. For example, institutions could increase the penalties or the likelihood of getting caught to
increase the cost of cheating. They could also increase the frequency (and reduce the weight) of
assessments to reduce the benefit of cheating on any one assessment.
1.4 a. Students face scarcity of time, like everyone else, and respond to the incentives of the teacher’s
grading system. Students have more incentive to direct their efforts into the parts of the course
that have the most weight in the grading system.
b. Too little weight on outside readings or the like gives students little incentive to read and master
the material. Students will put less effort into the parts of the course that have little effect on their
grades.
c. Quizzes over assigned readings would give students an incentive to come to class having read the
upcoming material. Some teachers give preparation assignments where students have to read and
answer questions about the upcoming material, and over the course of the semester students have
to successfully complete a certain percentage of the preparation assignments to qualify for an A,
or B, or other grade in the course.
Copyright © 2027
, 2 CHAPTER 1 | Economics: Foundations and Models
1.5 The carbon price and the subsequent increase in the price of gasoline (and other carbon-intensive
products) will encourage people to use less gasoline. If people respond to the negative incentive of
higher gas prices by using less gas, maybe by taking the bus or buying a more fuel-efficient car, we
will emit fewer greenhouse gases and do less damage to the environment.
1.6 a. In deciding whether or not to go to the gym on a specific day, most people aren’t comparing the
benefits of an active lifestyle and the cost of the gym membership. They’re comparing what they
stand to miss out on and the relatively small benefit any single workout will have on their overall
health. By implementing a simple payment system, the researchers increase the benefit of a small
number of trips to the gym. Further thought: The benefits of going to the gym tend to materialize
over a long time after the decision to go to the gym is made. Some of those benefits will be
received years into the future. By offering cash payments in the relatively near term, the
researchers offer a benefit that can be received in the same time frame as the costs of going to
the gym are paid.
b. Those who do not respond to the monetary incentive to go to the gym clearly value their other
options more than the health benefits and monetary reward received by going to the gym. Consider
a student who is working to pay for their education. The payment received by going to the gym is
likely less than the payment received by going to work. In short, the incentive isn’t big enough.
1.7 Akhila is correct. The difference between the grade before and after watching an extra episode is
exactly the same as knowing the change in the grade.
1.8 Your friend is failing to think at the margin. It doesn’t matter how much time your friend has already
spent studying psychology. What matters is the marginal benefit to be received from studying
psychology relative to the marginal cost, where cost is measured as the opportunity cost of lower
grades in other subjects. If the course is required to graduate, that may raise the marginal benefit
associated with completing the course.
The Economic Problems All Societies Must Solve
1.2 Learning Objective: Discuss how a society answers these three key economic questions:
What goods and services will be produced? How will the goods and services be
produced? Who will receive the goods and services produced?
Review Questions
2.1 Scarcity implies that every society and every individual face trade-offs because wants are unlimited,
but the ability to satisfy those wants is limited. Societies and individuals cannot have everything they
want, so they have to make choices about what to have and what not to have.
2.2 The three economic questions that every society must answer are: (1) What goods and services will
be produced? (2) How will the goods and services be produced? (3) Who will receive the goods and
services produced? In a centrally planned economy, the government makes most of these decisions.
In a pure market economy, almost all these decisions are made by the decentralized interaction of
households and firms in markets. In a mixed economy, most economic decisions result from the
interaction of buyers and sellers in markets, but the government plays a significant role in the
allocation of resources.
Copyright © 2027
